A note for today – the Law Firm Succession Series

The extract below is written as a knowledge piece.  It is written with the medium to long-term issues facing the profession in mind.

In that context it does not – directly – take account of the issues raised by the current Covid-19 outbreak.  The outbreak is undoubtedly damaging business and law firms are no exception.  Certain areas of law will be hit harder than others, but undoubtedly, businesses will be dealing with the effect of this for potentially many years to come.

However, this only emphasises the issues raised in this article series and the resulting White Paper and accelerates the need for Law Firms to address the challenges.

We hope you appreciate the ideas within the Succession White Paper and look forward to helping you with those challenges, whether in the current emergency or once some version of normality has returned.


A quick recap on Part One

Law firms have a problem.  There are too many owners that want to retire and too few people that are interested in taking over their business or share of their business and paying them out, so that they can do so.

If you are a partner or owner looking to retire soon, then you need a plan to ensure that you have a successor or two ready, willing and able to take over the reins.

That all sounds very simple but if you drill deeper into the problem, there are many issues to address in passing on your business.  Most owners focus upon the clients and the files.  They are important – critically important. But there are many other areas around the business that can create difficulties for the retiring owner and are often overlooked when retirement beckons.

In Part One we looked at the changing sector structure and the implications for succession planning – the sole trader and partnership models have steadily declined and largely been replaced by the Limited Company. A focus for part one was how to protect your core operating model – after all its not only lawyers who can retire after 20/30 years leaving a potentially huge knowledge gap.

Part Two

People

This has to be the hardest part of the jigsaw to find.  When looking for someone to take over the business, it is important to ensure that they are bought into the process early on.  Just as you need to plan early, they also need time to learn how to run a firm.  That means learning how to manage people, understand and manage its finances, what it is to be an entrepreneur and finding work.  It is taken as read that they have the technical ability.  These characteristics are not easily found in everyone.

The current generation of retirees are predominantly male.  The graph below, shows the demographic split of men, (left-hand-side) and women, (right-hand side), in the workforce and compares the latest data to the data from 2008, (black line).  You can see that the age profile of men has – more or less – remained static.  It also shows that there is a large number of men over 70, who still have practising certificates.  On the right-hand side, there has been a marked increase in the number of women in the profession with practising certificates.  As those women age and assuming they remain in the profession, they will eventually be in the majority in every age bracket.

This is an important point to bear in mind for succession planning: the potential successors nowadays are increasingly likely to be female rather than male. And that has implications for the way you search for the successor and the offer that is put on the table.

To maximise the chance of successfully passing their business on, the current equity owner must make the offer equally attractive to male and female candidates.  This may result in more part-time partners or more flexible or ‘agile’ working practices being offered through your IT systems.

Practicing certificate holders

The cheapest way of ensuring a successful handover to the next equity owner is to ‘grow’ them from within.  This has the advantage that they know the firm, its staff, and clients and the way it works.  A formal programme of education and providing them with exposure to the issues that they will experience in owning and managing the firm, will ensure that they are ready to take on the responsibility when the time is right.  It may also provide them with the opportunity to realise that taking on the risks of equity ownership is not for them.  It is better to train a small number of staff to be potential equity owners and allow some of them to realise that they are not suited to entrepreneurial existence, than not to train them and have nobody ready to take over from you in due course.

All this takes time.  There may be a couple of false starts.  However, if you don’t prepare some staff for the opportunity, you may be left with the other possibility of hawking your firm around the local competition or to one of the many consolidating firms that are currently acquiring firms cheaply because the owners are left with no choice.

Larger firms obviously have the ability to develop people from post-qualification and take them right through to equity ownership.  This will be through a process of giving them supervisory experience, followed by team or department management responsibility.  All of this should be alongside training in the necessary skills to manage the firm, such as people management, project management, quality improvement, risk management and personal management and skills training, (e.g. resilience, time management, business development, and so on).

As with the smaller firms, some people will fall by the wayside but those with the commitment to the firm and who demonstrate the requisite ability will be ready to take on the mantle.

Finally, in terms of growing your own successor, we are aware that anecdotally, fewer people these days want to take on the risks of equity ownership.  They are not looking for a long-term career with the same firm but want to have a more portfolio-style career or change careers a couple of times in their lives, perhaps with travel breaks in between. So, while there are more people with practising certificates now than ever before, it is not a given that there will be plenty ready to take on the equity that is offered.  Part of the training must be an honest explanation of the risks and rewards of equity.  Every firm that is honest with its staff about the offer on the table will be more highly regarded than any that hide the downsides while overplaying the upsides.

The other option is to find people from outside. This may be by private conversations with other firms or by asking a headhunter to find someone for you.  The former may be cheaper and may provide you with a known entity taking on your business but will not provide the largest pool of potential talent.  For example, if you know the partners in another local firm and talk to them, they can only decide if they would be interested; they are unlikely to speak for others within their firm or others outside their firm.

Using a headhunter will be more likely to identify individuals within their firm who are interested in progressing but being held back.  They may well be interested in taking on your business.  Only a headhunter, who perhaps already has a list of candidates for equity, or knows other firms who would be interested in your business, would be able to identify and approach those candidates for you.  They have the great advantage of approaching individuals anonymously, so your retirement intentions remain secret – until a Non-Disclosure Agreement can be signed.

Remediating relationship risk

For buyers and sellers, the devil is always in the detail and that’s why we have due diligence. But there are emerging considerations that are adding to the scope of due diligence – and adding to the pressure to get it right.

When a partner exits, it’s not just a lifetime’s knowledge and experience that goes with them. It can also be key client relationships. It is one of the singular characteristics of law firms that clients tend to have relationships with individuals rather than the firm, and so when that individual leaves there is a heightened risk that the client will leave with them. Obviously that risk is somewhat mitigated in a retirement scenario but even so any change can increase the chances of a client considering their options. But, and it’s a big but, how do you know just how important that one-to-one relationship was?

The exiting partner might talk it up but where’s the evidence? Perhaps there was an influential relationship once but now the power base is with others, a different lawyer and a different client contact? And just how many links are there between a firm and a client, are there several partners in different practice areas with their own connections? If the senior partner, say, was to leave, would the relationship collapse or would it stay strong on the back of a web of multiple interactions. And if the senior partner wasn’t the real power broker, who is?

Mapping lawyer/client touchpoints and analysing all the interactions between the client and the whole law firm can help generate amazing insights into client ownership – who in the firm has the strongest relationship with the client, who else in the firm is active with that client, who in the firm knows other people in the client, not just the principle contact.

All this type of intelligence can now be automatically harvested and presented so that those involved in any change of ownership can get a clear idea of ‘relationship risk’ at an early stage. If the data shows you are about to lose a rainmaker around whom a whole account revolves, then you can get ahead of the game and manage the transition, build new connections, effect a seamless handover, rather than just walking blindly into the abyss.

Next time…

Succession isn’t just about people and process – a PI insurers’ assessment of a law firm’s business is key to continuing financial and risk management health, and crucial to any merger or acquisition discussions.  In Part Three we cover the PII implications and the successor practice rules, and other aspects to consider.

Thanks to all the Calico Succession panel experts:

Richard Wyatt, Baskerville Drummond

Patricia Kinahan, Hazlewoods

Alex Holt, The Cashroom

Brian Boehmer, Lockton

Can our group of experts help your firm?